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Jun 18
2010

BP's market value shows reputation gone

Posted by Ron F in Riskoil productionObama Administrationcash flowcash concernsCash

Ron F

The surest sign that BP's reputation has is worthless is the fact that its stock's market value is now about equal to the book value of its assets. After all, any premium over book value is normally considered to reflect a company's intangible assets, and in BP's case at the moment, its primary intangible is reputation, or rather the lack of one.

So observes Charles Mulford, an accounting professor at Georgia Tech and an editorial advisor to CFOZone.

Given the financial problems flowing from the hole at the bottom of the Gulf of Mexico left by the destruction of the Deepwater Horizon oil rig, Mulford says the fact that company's market value has fallen to about its book value "makes complete sense."

But so far at least, it also suggests that the company is capable of paying off any claims associated with the disaster. While the company is setting aside $20 billion to compensate victims, the latest estimates are that the total damages could be double that amount.

Should those estimates go higher still, and the company's market value falls below its book value, then Mulford says that would be a sign that investors expect the damages to produce losses for the company, and the value of its assets would then fall.

Yet that flies in the face of what some experts are saying about the disaster. Steve Kreit, a consultant at Eisner, told CFOZone yesterday that the loss of an intangible asset is incalculable, and that "a lost reputation can sink a company."

But the market is saying BP's reputation is already gone, at least for now. From here on, the question is simply whether the company can generate enough cash to pay off its claims, and that depends on how high the damages go and how much of its assets it has to sell to pay them.

Until that becomes clear, all the damage that can be done to the stock seems already to have been exacted. Simply put, BP has no more reputation to lose, so its survival now depends not on its intangible assets but on the cash flow its tangible ones produce.

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